JOHN T. SHAW, on behalf of himself and all others similarly situated; KENNETH COKE; RAYMOND RYDMAN v. EXPERIAN INFORMATION SOLUTIONS, INC.
No. 16-56587
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
May 29, 2018
D.C. No. 3:13-CV-01295-JLS-BLM;
Before: MARY M. SCHROEDER and MILAN D. SMITH, JR., Circuit Judges, and GERSHWIN A. DRAIN, District Judge. Opinion by Judge Milan D. Smith, Jr.
The Honorable Gershwin A. Drain, United States District Judge for the Eastern District of Michigan, sitting by designation.
SUMMARY**
Fair Credit Reporting Act
The panel affirmed the district court‘s summary judgment in favor of defendant Experian Information Solutions, Inc., in an action brought under the Fair Credit Reporting Act.
Plaintiffs alleged that Experian, a consumer reporting agency, violated the FCRA in the manner in which it reported short sales on their real property.
The panel held that plaintiffs’ reasonable procedures and reasonable reinvestigation claims under
Plaintiffs’ failure to disclose claim under
Plaintiffs’ request for statutory damages under
COUNSEL
Guerino John Cento (argued), Cento Law LLC, Indianapolis, Indiana; Matthew J. Zevin, Stanley Law Group, San Diego, California; for Plaintiffs-Appellants.
Adam Wiers (argued), Jones Day, Chicago, Illinois; Kelly V. O‘Donnell, Jones Day, San Diego, California; for Defendant-Appellee.
OPINION
M. SMITH, Circuit Judge:
Plaintiffs-Appellants John Shaw, Kenneth Coke, and Raymond Rydman (collectively, Appellants) brought this action against Defendant-Appellee Experian Information Solutions, Inc. (Experian), alleging violations of the Fair Credit Reporting Act (FCRA),
First, we hold that Appellants’ reasonable procedures and reasonable reinvestigation claims fail because Appellants’ credit reports were accurate. Second, Appellants’ failure to disclose claim fails because Experian clearly and accurately disclosed to Appellants all information that Experian recorded and retained that
FACTUAL AND PROCEDURAL BACKGROUND
I. Credit Reporting Industry
Experian is a consumer reporting agency (CRA) as defined by the FCRA.
Once CRAs receive credit information from furnishers, they compile and distribute the information to subscribers through credit reports, and to consumers through consumer disclosures.1 Even though it receives its data input in the standardized Metro 2 format, each CRA uses its own proprietary coding format to analyze and report credit information to subscribers. Experian provides credit reports to approximately 15,000 subscribers. It delivers its credit reports in a proprietary computer-generated format that displays credit information “in segments and bits and bytes,” but Experian provides technical manuals that enable subscribers to read and understand the credit reports they receive. Subscribers cannot read Experian‘s reports without these technical manuals.
II. Short Sales
A short sale is a real estate transaction in which the property serving as collateral for a mortgage is sold for less than the outstanding balance on the secured loan, and the mortgage lender agrees to discount the loan balance because of a consumer‘s economic distress. A short sale is a derogatory credit event that furnishers report to CRAs in a particular manner. By 2009, the CRRG instructed furnishers to report short sales to CRAs using an Account Status Code of “13 or 61-65, as applicable,” a Special Comment of “AU (Account paid in full for less than the full balance),” and a Current Balance and Amount Past Due amount of zero. An Account Status Code of 13 indicates a “[p]aid or closed account/zero balance,” while 61 through 65 indicates the account was paid in full and there was a “voluntary surrender,” “collection account,” “repossession,” “charge-off,” or “foreclosure . . . started.”
When Experian receives data reporting a short sale, it must translate the data into its proprietary coding before it can export the data. Experian‘s technical manual describes how it codes short sales:
- Account type: A mortgage-related account, such as a first mortgage or home equity line of credit.
- “Account condition” and “payment status” code: 68, which corresponds to a Special Comment of “Acct legally paid in full for less than the full balance.” The 68 automatically populates a 9 into the first position on the payment history grid to display the “Settled” status.
- Payment history grid showing the final status (“Settled“) in the first digit, followed
by 24 months of payment history information. - Date in 25th month in the payment history grid corresponds to the date the furnisher reported the “Settled” status to Experian.
Thus, in the case of a short sale, the reported account condition code is 68 (“Account legally paid in full for less than the full balance“), which then automatically inserts the number 9 into the payment history grid (to display a “Settled” status).2 But a lead payment history code of 9 can represent multiple derogatory, non-foreclosure statuses. These include “Settled, Insurance Claim, Term Default, Government Claim, Paid by Dealer, BK Chapter 7, 11 or 12 Petitioned, or Discharged and BK Chapter 7, 11 or 12 Reaffirmation of Debt Rescinded.”
Foreclosures, on the other hand, are reported with a lead payment history code of 8 and an account condition and payment status code of 94 (“Creditor Grantor reclaimed collateral to settle defaulted mortgage“). According to Experian‘s technical manuals, it is impossible for Experian‘s credit reports to reflect a foreclosure with a lead payment history code of 9.
Experian prepares consumer disclosures in a more easily read format than the credit reports Experian provides to subscribers. For example, when an account in an Experian credit report contains code combination 9-68, the consumer disclosure lists “CLS” (Closed) in the lead payment history grid position. The disclosure also lists the account‘s status as “Paid in Settlement” with a creditor‘s statement of “Account legally paid in full for less than full balance.”
III. Fannie Mae
Fannie Mae is a government-sponsored entity that purchases loans from certain lenders. The rules governing Fannie Mae‘s operations restrict which loans it can purchase, and it partly implements those restrictions through its own proprietary software, called Desktop Underwriter. Fannie Mae also licenses Desktop Underwriter to certain lenders. Importantly for Appellants, consumers with a prior foreclosure must wait seven years before obtaining a new mortgage through Fannie Mae, whereas consumers with a prior short sale need wait only two years.
When a prospective borrower submits a mortgage application to Fannie Mae, Desktop Underwriter analyzes credit report data about the prospective borrower obtained from CRAs. In doing so, Desktop Underwriter relies on Fannie Mae‘s manner of payment code (MOP), which corresponds to Experian‘s lead payment history code. Until 2013, Desktop Underwriter “identified [mortgage accounts] as a foreclosure if there [was] a current status or [MOP] of ‘8’ (foreclosure) or ‘9’ (collection or charge-off).” In other words, Fannie Mae elected to treat code 9 the same as it treated code 8, even though it knew from the instructions Experian had provided that code 9 did not represent a foreclosure, and that it was “necessarily capturing accounts that [were] not actually foreclosures.” Fannie Mae‘s treatment of lead payment history codes 8 and 9 caused significant adverse consequences because it led Fannie Mae to impose a seven-year waiting period on consumers with a prior short sale, when the waiting period should only have been two years.
IV. Discovery of the Reporting Error
In 2010, consumers with prior short sales began notifying Experian that lenders
Appellants discovered this error during this same time period. Shaw executed a short sale in March 2010. He later ran his information through Desktop Underwriter, which indicated that he had executed a prior foreclosure. When he applied for a new mortgage, the bank used Freddie Mac‘s (which is distinct from Fannie Mae) underwriting software, and it identified a short sale, not a foreclosure. The bank originated this loan because it understood that Shaw had experienced a prior short sale, not a foreclosure.
Coke executed a short sale in 2011. The next year, he obtained a mortgage from a bank that used an underwriting system other than Desktop Underwriter, and that software correctly identified this short sale. In 2013, the bank attempted to underwrite a different mortgage using Desktop Underwriter, which identified a possible foreclosure. Coke eventually received a loan from the bank once it recognized that Experian coded the account as a short sale, but he alleges that the loan had a higher interest rate, and this caused him stress and embarrassment.
Rydman executed a short sale in June 2011. In 2013, he applied for a new mortgage, and when the prospective lender used the Desktop Underwriter software, it identified a possible foreclosure, and his loan application was denied. He applied for another mortgage the following year, and received it because the lender did not use Fannie Mae‘s Desktop Underwriter, and did not identify a potential foreclosure in his credit history. He alleges that the delay in obtaining a new mortgage caused him approximately $55,000 in damages.
Between 2012 and 2013, each Appellant received a copy of his Experian consumer disclosure. Each subsequently disputed Experian‘s reporting of his prior short sales, and Experian responded to each dispute in 2013.
In early 2013, the CRAs approved a new short sale code, which Experian implemented. In late 2013, Fannie Mae also updated its software to distinguish applicants that had executed short sales from those that had endured foreclosures. In 2014, Fannie Mae further refined Desktop Underwriter to identify foreclosures when there is a MOP code of 8 or foreclosure-related remarks code, and short sales when there are specific short sale-related remarks codes.
V. Procedural History
After receiving Experian‘s responses to their disputes, Appellants filed this putative class action in June 2013 against Wells Fargo, CitiMortgage, and Experian for violations of the FCRA. Following the stipulated dismissal of Wells Fargo and CitiMortgage, Appellants filed a second amended complaint alleging three claims against Experian: (1) a reasonable procedures claim pursuant to
STANDARD OF REVIEW
We have jurisdiction over this appeal pursuant to
ANALYSIS
The FCRA arose out of “congressional concern over abuses in the credit reporting industry.” Guimond v. Trans Union Credit Info. Co., 45 F.3d 1329, 1333 (9th Cir. 1995). Congress thus enacted the FCRA in order “to ensure fair and accurate credit reporting, promote efficiency in the banking system, and protect consumer privacy.” Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 52 (2007). We apply a liberal construction in favor of consumers when interpreting the FCRA. Guimond, 45 F.3d at 1333.
I. Reasonable Procedures and Reasonable Reinvestigation Claims
[I]f the completeness or accuracy of any item of information contained in a consumer‘s file at a [CRA] is disputed by the consumer and the consumer notifies the agency directly . . . of such dispute, the agency shall, free of charge, conduct a reasonable reinvestigation to determine
whether the disputed information is inaccurate and record the current status of the disputed information, or delete the item from the file . . . before the end of the 30-day period beginning on the date on which the agency receives the notice of the dispute from the consumer . . . .
In other words, a CRA must conduct a free and reasonable reinvestigation within thirty days of a consumer informing the CRA of disputed information. See id. However, what constitutes a “reasonable reinvestigation” will vary depending on the circumstances of the case. See Gorman v. Wolpoff & Abramson, LLP, 584 F.3d 1147, 1160 (9th Cir. 2009). Moreover, although
Thus, to sustain either a
We first clarified the meaning of “inaccurate” for purposes of the FCRA in Gorman. There, we held that information is inaccurate for purposes of
The only purported inaccuracy to which Appellants plausibly point is Experian‘s reporting of Appellants’ prior short sales. Because Experian has shown that it reported Appellants’ short sales using code combination 9-68, we must determine whether this manner of reporting was either “patently inaccurate” or “misleading.”
We hold that it was not. First, we conclude that reporting Appellants’ short sales using code combination 9-68 was not “patently incorrect.” Neither party argues that this code combination does not represent a short sale, and we find no evidence in the record to that effect.
The closer question, and the one on which Appellants rest much of their case, is whether Experian‘s reporting of
That standard was not met here. Appellants argue that Experian‘s reporting of Appellants’ short sales was misleading because Experian‘s use of “catchall code 9” in the lead payment history spot caused Fannie Mae to treat the short sales as potential foreclosures. However, this argument fails to consider that Experian reported Appellants’ short sales with code combination 9-68. Account status code 68 automatically inserts 9 into the lead payment history spot, signifying that the account is “SETTLED” and “legally paid in full for less than the full balance.” This is the very definition of a short sale. Moreover, Appellants point to no authority suggesting that the inclusion of language describing what happens in a short sale, as opposed to the exact term “short sale,” is so misleading as to constitute a FCRA violation. Appellants are correct that the statute refers to “maximum possible accuracy,” not merely technical accuracy.4 See
We find persuasive the reasoning of a recent district court decision from our circuit addressing this very issue. In Banneck v. HSBC Bank USA, N.A., No. 15-CV-02250-HSG, 2016 WL 3383960, at *1, *3-4 (N.D. Cal. June 20, 2016), the plaintiff executed a short sale and Experian reported it with code combination 9-68. The plaintiff applied for a subsequent mortgage loan, and the lender ran the plaintiff‘s application through Desktop Underwriter, which it had licensed from Fannie Mae. Id. at *4. The search triggered a “Refer with Caution” recommendation due to payment history grid code 9. Id. The district court reasoned that the plaintiff “has produced no evidence that Experian reported his short sale as anything other than a short sale.” Id. at *6. Notwithstanding the use of payment history grid code 9, which has multiple meanings, Experian‘s reporting was not misleading because it “clarifie[d] which credit event [was] actually being reported with an undisputedly clear additional code“—account status code 68. Id. at *7. Accordingly, the district court granted summary judgment in favor of Experian due to a lack of inaccurate reporting. Id. at *7-8.
We are not swayed by Appellants’ attempts to distinguish Banneck by arguing that account status code 68 is not “an
Furthermore, even if code combination 9-68 could stand for other derogatory events and thereby be “misleading,” that alone would not render Experian‘s reporting actionable. The reporting must be “misleading in such a way and to such an extent that it can be expected to adversely affect credit decisions.” See Gorman, 584 F.3d at 1163 (emphasis added) (quoting Sepulvado, 158 F.3d at 895); see also
Here, there is no evidence that code combination 9-68 could have represented a foreclosure. When Experian codes foreclosures, it uses a code combination of 8-94, meaning “[c]reditor [g]rantor reclaimed [the] collateral to settle defaulted mortgage.” And a foreclosure does not occur where a mortgage account is “legally paid in full for less than the full balance” as occurs with a short sale. Evidence that Fannie Mae employees have, in the past, seen foreclosures coded with lead payment history code 9 fails to recognize that our inquiry is whether code combination 9-68 could represent a foreclosure.
Certainly, Fannie Mae‘s treatment of code 9 on Appellants’ accounts as a possible foreclosure could have adversely affected credit decisions when Appellants sought new mortgages. But this does not render Experian‘s reporting misleading. Fannie Mae conceded that it knew that, by treating accounts with code 9 as a foreclosure, it was “necessarily capturing accounts that [were] not actually foreclosures.” Thus, the record before us indicates that the inaccurate reporting of Appellants’ short sales was due to Fannie Mae‘s mistreatment of Experian‘s coding, not Experian‘s own inaccuracies. Appellants introduce evidence that there was “confusion and complaints about code 9,” but can point to no other subscribers or underwriting software that could not identify a short sale from code combination 9-68.
Appellants also contend that Experian‘s reporting was misleading because Experian knew that Fannie Mae was misreading
In sum, Appellants fail to point to any inaccuracies on their credit reports. Because they fail to meet this threshold burden, we need not consider whether Experian had reasonable procedures or conducted reasonable reinvestigations when Appellants disputed their credit information. We therefore affirm the district court‘s grant of summary judgment with regard to Appellants’ reasonable procedures and reasonable reinvestigation claims.
II. Failure to Disclose Claim
First, Appellants argue Experian‘s consumer disclosures violated
Appellants argue that because the status category on a consumer disclosure (“Paid in settlement“) is a separate category from the lead digit in the payment history grid on a credit report, these categories serve different purposes. However, Appellants cite to neither portions of the record nor guiding case law supporting this position. Our inquiry here is whether the disclosure is “understandable to the average consumer,” and it is unclear to us how the specific placement of “[p]aid in settlement” on the consumer disclosure could affect a consumer‘s comprehension. See Gillespie v. Equifax Info. Servs., LLC, No. 05 C 138, 2008 WL 4316950, at *6 (N.D. Ill. Sept. 15, 2008) (describing the holding of Gillespie v. Equifax Info. Servs., LLC (Gillespie II), 484 F.3d 938 (7th Cir. 2007)). To the contrary, Experian complied with
Third, we reject Appellants’ argument that Experian violated
We also note that Experian is not required to report that Fannie Mae mishandled its data. Experian is only required to report “information on the consumer that is recorded and retained by [Experian] . . . in a consumer report.” Cortez, 617 F.3d at 711 (quoting Gillespie I, 482 F.3d at 909). Fannie Mae‘s misreading of lead payment code 9 is not information retained by Experian in any credit report. Therefore, it falls outside the bounds of a “file” for purposes of
Appellants received complete copies of their consumer reports. They are not entitled by the FCRA to information that is not in their report, and they fail to identify what information Experian improperly excluded from its disclosures. We therefore affirm the district court‘s grant of summary judgment with regard to Appellants’ failure to disclose claim.
III. Willfulness Pursuant to 15 U.S.C. § 1681n
As we conclude that Experian did not violate the FCRA, Appellants’
Recklessness is an objective standard. See id. at 68-69. A defendant acts in reckless disregard when its action both is “a violation under a reasonable reading of the statute‘s terms” and “shows that the company ran a risk of violating the law substantially greater than the risk associated with a reading that was merely careless.” Id. at 69.
As to Appellants’ first two claims, there was no statute, CFPB guidance, or case law that “might have warned [Experian] away from the view it took” or informed Experian that its approach to reporting short sales was objectively unreasonable.
As previously discussed, a district court has agreed with Experian‘s position regarding the accuracy of its reporting. See Banneck, 2016 WL 3383960, at *6. Admittedly, Banneck was decided after this litigation began and therefore Experian could not have relied upon its reasoning. But we cannot conclude that Experian‘s interpretation was objectively unreasonable when it relied on the guidance of its regulatory agency and at least one district court has subsequently agreed with its interpretation of the FCRA. See Safeco, 551 U.S. at 70 n.20 (“Where, as here, the statutory text and relevant court and agency guidance allow for more than one reasonable interpretation, it would defy history and current thinking to treat a defendant who merely adopts one such interpretation as a knowing or reckless violator.“).
Appellants similarly fail to show willfulness as to their failure to disclose claim. Even if Experian had violated
CONCLUSION
For the foregoing reasons, we affirm the district court‘s grant of summary judgment in favor of Experian.
AFFIRMED.